Subsidies in question as Egypt’s deficit rises

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CAIRO: While talk of reducing expenditures by cutting back on some subsidies may make sense in numbers and figures — to deal with Egypt’s increasing budge deficit and decreasing foreign reserves — it will likely prove difficult to justify on a social level.

Mahmoud Nasr, a senior army financial official, told Reuters last week that Egypt’s deficit will rise from LE 133 billion to LE 167 billion. He pointed out that as Egypt spends "LE 95.5 billion on petrol subsidies, LE 19 billion pounds on food subsidies, and LE 5 billion for subsidies on electricity," an efficient way to tackle the deficit would be to cut down these expenses.

However, touching subsidies is a socially sensitive issue, with over 40 percent of Egyptians living under the poverty line, and may fuel further social unrest.

"There may be a possibility that they cut down petroleum subsidies, but cutting down food is just not going to happen," said Angus Blair, an economic analyst.

Currently in Egypt, petroleum subsidies are more than the country’s education budget, according to Blair. "In a modern country, you want to develop people’s minds," he said.

Enhancing the way the government spends will also start forcing people to change the way they consume, and thus they will prioritize their needs.

"Right now, the petroleum budget is unsustainable, oil prices will continue to rise everywhere, but Egypt has one of the highest subsidies for petroleum products," he said.

"It is definitely going to help reduce government expenditure if they cut down these kinds of subsidies; however, cutting down food is just not an option," he said.

Egypt’s ruling military said it will lend $1 billion to the central bank as it struggles with plunging foreign reserves that threaten the country’s ability to import. Foreign reserves "will go from the current $22 billion to $15 billion by the end of January. The amount is not enough to cover the country’s imports for more than three months," said Nasr.

Meanwhile, another crisis is hitting many homes nationwide: a shortage in butane gas.

Egypt currently imports oil products like diesel and butane gas because the country produces only 50 percent of its butane gas usage and 75 percent of the local consumption of diesel oil, according to public statements by Abdullah Ghorab, minister of petroleum.

Butane gas cylinders, used in many Egyptian households for cooking or heating, have seen a surge in prices over the past weeks as the lack of security has encouraged a black market.

The average price of a Liquefied Petroleum Gas (LPG) cylinder coming directly from the ministry costs vendors about LE 2.50, according to the official website of the Ministry of Petroleum.

When they are resold to people by local vendors or distributors, prices can reach LE 7 to LE 20.

This week, prices have climbed due to a shortage in available cylinders, reaching LE 40 in some areas.

While the shortage is a seasonal problem, prices have reached a new high. In winter of 2010, consumers were outraged when prices of cylinders reached LE 15.

On the other hand, Egypt’s exports of crude oil and petroleum products from January to October increased 38.9 percent reaching $5 billion from $3.4 billion last year, according to Egypt’s State Information Service.

"Reserves are declining; basic fundamentals including gas have been decreasing over the past two to three years," said Noran Ali, petroleum analyst at CI Capital. "One way to solve this would have been to change infrastructure of the country and continue providing natural gas in every household instead of increasing exports."

Homes or facilities equipped with natural gas in Egypt do not have to rely on buying butane gas cylinders.

However, the majority of Egyptians living in rural areas or poverty-stricken neighborhoods in Cairo or Alexandria are forced to deal with the increased prices as they need the butane gas to cook or heat up water.

Ali pointed out that the crisis can also be partially attributed to the lack of governance and security that has hit the country over the past nine months.

Security has been an issue since the Supreme Council of the Armed Forces took over power after the ouster of Hosni Mubarak in February. Many also attribute the deteriorating economic situation to a lack of executive authority given to appointed ministers.

"It has been worse lately because of security issues, this has given more room for the black market because nobody is monitoring the situation and there is no control from the government," said Ali.

The country began its first round of parliamentary elections on November 28, which according to Ali, where very well-secured unlike any other election in history.

"The way the elections have been secured proves that the military is capable of providing security in the country," she said.

Ali, however, said that the country is not seeing this kind of top-notch security anywhere else.

"Part of the bigger picture seems to be that the government and the military want to keep people occupied with their very basic needs instead of focusing on elections, politics, or other social issues," said Ali.

Ali pointed out that although the priority of the government should be to provide natural gas to citizens before exporting the resource, the issue is complicated because the previous regime has binding contracts with several countries including Spain, Israel, France and Jordan.

The Sinai gas pipeline reaching Israel and Jordan has been attacked by unknown assailants nine times this year. The most recent attack was last just over a week ago in the midst of Egypt’s first round of parliamentary elections.

"We are currently bound by contracts and deals and it makes no sense to change them now as these countries can seek arbitration," said Ali. "This is just a legacy of the old regime that we will have to deal with."

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